Core Concepts of Marketing by John Burnett - HTML preview

CHAPTER 9

PRICING THE PRODUCT

would likely do better to buy

inexpensive computer and sign up for

a $ l O-a-month lim ited-access accou nt with a service provider.

People who u s e the Internet a lot may also be poor candidates .

That's because three year s is a long commitment at a time when

Internet acces s technology is changing rapidly. Heavy users are likely

t o be the earliest a dopters of high-speed cable or digital subscr .ber

line s ervice a s it becom es available in their areas.

Sources: S tephen H. Weldstrom.

High Cost of Free PCs ." Business Week,

September 13, 1999. p. 20 ; Steven Bruel. "Why Talk's Cheap ," Business Week ,

Septeber 13. 1999, p p. 34-36; Mercedes M. Cardona and Jack Neff,

thing's at a Premium, " A dvertising Age, August 2. 1999, pp. 12- 13 .

Which strategy is best depends on a number of fac tors. A penetration strategy would

generaJly be supported by the following conditions: price-sensitive consumers , opportun ity

to keep costs low, the anticipation of quick market entry by competitors, a high likelihood

for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet

the new demand and sales.

A skimmi ng strategy is most appropriate when the opposite conditions exist. A

mium product generally supports a skimming strategy. In this case, "premium" doesn' t just denote high cost of production and materials ; it also suggests that the product may be rare

or that the demand is unusually high. An example would be

$500 ticket for the World

Series or an $80,000 price tag fo r a limited-production sports

Havi ng legal protection

via a patent or copyright may also allow for an excessively high price . Intel and thei r Pen-

tium chip possessed th is advantage for a long period of time. In most cases, the initial high

price is gradually reduced to match new competition and allow

customers access to

the product.

Skimming

Price

Penetration

Price

D...

Skimming

Penetration

Quantity demanded in a given period of time (# of unit)

Skimming generates a higher profit margin whil e penetration generates

greater volume.

FIGURE 9.3

Penetration and

pricing st i·ategies as the\' relate to t he demand

curve

PRICE FLEXIBILITY

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PRICE LINES

already familiar with price lines. Ties may be priced at $15, $ 17, $20, and $22.50;

tluejeans may be priced at $30, $32.95, $37.95, and $45 . Each price must be far enough

so that buyers can see definite quality differences among products. Price lines tend

to be associated with consumer shopping goods such as apparel, appliances, and carpeting

rather than product lines such as groceries. Customers do

little comparison-shopping

on

latter.

Price lining serves several purposes that benefit both buyers and sellers . Customers

want and expect a wide assortment of goods, particularly shopping goods. Many small price

differences for a given item can be confusing. If ties were priced at $1 5, $15 .35, $15 .75 ,

and so on, selection would be more difficult; the customer could not judge quality differ-

as reflected by such small increments in price. So, having relatively few prices reduces

the confusion.

From the seller's point of view, price lining holds several benefits. First, it is

pler and more efficient to use relatively fewer prices. The product/service mix can then

be tailored to selected price points . Price points are simply the different prices that make up the line. Second, it can result in a smaller inventory than would otherwise be the case.

It might increase stock turnover and make inventory control simpler. Third, as costs change,

either increasing or decreasing the prices can remai n the same, but the quali ty in the line

can be changed. For example, you may have bought a $20 tie fifteen years ago. You can

buy a $20 tie today, but it is unlikely that today 's $20 tie is of the same fine quality as it

was in the past. While customers are likely to be aware of the differences, they are

ertheless still able to purchase a

tie. During inflationary periods the quality/price point

relationship changes. From the point of view of salespeople, offering price lines will make

selling easier. Salespeople can easily learn a small number of prices. This reduces the

lihood that they will misquote prices or make other pricing errors. Their selling effort is

therefore more relaxed, and this atmosphere will influence customers positively. It also

gives the salesperson flexibility. If a customer can't afford a $2,800 Gateway system, the

system is suggested.

PRICE FLEXIBILITY

Another pricing decision relates to the extent of price flexibility. A flexible pricing policy means that the price is bid or negotiated separately for each exchange. This is a common

practice when selling to organizational markets where each transaction is typically quite

large. In such cases, the buyer may initiate the process by asking for bidding on a product

or service that meets certain specifications. Alternatively.

buyer may select a supplier and

attempt to negotiate the best possible price. Marketing effectiveness in many industrial

kets requires a certain amount of price flexi bi lity.

Discounts and Allowances

In addition to deci sions related to the base price of products and services, marketing

agers must also set policies related to the use of discounts and allowances. There are many

types of price red uctions-each designed to accomplish a specific purpose.

Quantity discounts are reductions in base price given as the resuL of a buyer purchasing some predeterm:ned quantity of merchandise. A noncumulative quantity discount applies

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